3
Oil and Gas Supply

As we have seen in chapters 1 and 2, the primary source of the energy problem lies in the peaking of U.S. oil and natural gas production around 1970 while domestic demand was still growing rapidly. This rapidly accelerated the growth of oil imports, threatening the nation’s economic and political security and also placing stresses on world oil markets that had political, financial, and economic implications in all the countries of the world. As we shall show further in this chapter, the likelihood of reversing the slow decline in domestic oil and natural gas production is quite small, and the prospect of compensating for this decline by continued growth of oil imports is equally small, at least beyond a few years in the future.

In 1978 the United States consumed 37.8 quads of oil and 19.8 quads of natural gas, about three fourths of the 78-quad total domestic primary energy consumption. Of this, 17.5 quads of oil (13.25 quads as crude oil and 4.23 quads as refined products) were imported, while all of the natural gas, except about 0.5 quad, was produced domestically. U.S. energy imports were greater than those of any other single country, although constituting a much smaller fraction of total energy consumption than for most of the other industrial countries in the noncommunist world. Future actions of the United States that affect its needs for oil imports have a tremendous impact and are viewed with intense interest and concern outside the United States—much more so, apparently, than by our own citizens except in occasional crisis situations. In the next several years all the problems, domestic and international, stemming from U.S. oil imports are likely to intensify unless we succeed in moderating our demand for



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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems 3 Oil and Gas Supply As we have seen in chapters 1 and 2, the primary source of the energy problem lies in the peaking of U.S. oil and natural gas production around 1970 while domestic demand was still growing rapidly. This rapidly accelerated the growth of oil imports, threatening the nation’s economic and political security and also placing stresses on world oil markets that had political, financial, and economic implications in all the countries of the world. As we shall show further in this chapter, the likelihood of reversing the slow decline in domestic oil and natural gas production is quite small, and the prospect of compensating for this decline by continued growth of oil imports is equally small, at least beyond a few years in the future. In 1978 the United States consumed 37.8 quads of oil and 19.8 quads of natural gas, about three fourths of the 78-quad total domestic primary energy consumption. Of this, 17.5 quads of oil (13.25 quads as crude oil and 4.23 quads as refined products) were imported, while all of the natural gas, except about 0.5 quad, was produced domestically. U.S. energy imports were greater than those of any other single country, although constituting a much smaller fraction of total energy consumption than for most of the other industrial countries in the noncommunist world. Future actions of the United States that affect its needs for oil imports have a tremendous impact and are viewed with intense interest and concern outside the United States—much more so, apparently, than by our own citizens except in occasional crisis situations. In the next several years all the problems, domestic and international, stemming from U.S. oil imports are likely to intensify unless we succeed in moderating our demand for

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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems both oil and gas, which translates into increased oil imports, at least in the short term. In the longer term the development of other domestic energy forms (at first mainly electrical generation by coal and nuclear power, later synthetic liquids and gases derived from coal and oil shale, and finally solar and other long-term energy sources) will also contribute increasingly to the moderation of oil imports. In general it is to be expected that the demand for fluid fuels in the rest of the world will increase faster in percentage terms than in the United States, especially if the developing countries are to realize their aspirations for rapid economic development. Given the probability that world oil production will peak in the 1990s and decline gradually thereafter, it is thus extremely unlikely that the United States will be able to offset its declining domestic production of fluid fuels by increasing its share of world imports. Instead, political and economic pressures on the United States to decrease its share of imports will steadily mount. DOMESTIC OIL AND GAS PRODUCIBILITY RESOURCES AND RESERVES The availability of minerals is stated in terms of “resources” and “reserves.” Resources include all deposits known or believed to exist in such forms that economic extraction is currently or potentially feasible. Reserves are that part of the identified resources that can be economically extracted with current technology and at prevailing prices. The price dependence of reserve estimates is important. As returns to producers rise, reserves in previously discovered fields increase, because more of the minerals underground become economically recoverable. An improvement in recovery technology may similarly add to reserves by making more of the resource available at the prevailing price. Policy changes can also affect reserves; a change in environmental regulations, for example, may make more or less of the basic resource economically recoverable. Table 3–1 lists the estimates of the Supply and Delivery Panel’s Oil and Gas Subpanel of U.S. and world oil and gas resources and reserves. It can be seen that the United States, which consumes more than a fourth of the world’s oil production and about half the world’s production of natural gas, has only about a twentieth and a tenth, respectively, of the world’s proved oil and gas reserves. It should be noted, however, that the reserve figures in Table 3–1 do not reflect oil and gas in existing fields that have become economically recoverable as a result of the large price increases starting in 1973. The figures are therefore understated. Calculations to

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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems TABLE 3–1 Estimates of U.S. and World Resources and Reserves of Crude Oil and Natural Gas as of 1975 (quads) Location Crude Oila Natural Gas Total Resources       United Statesb 667 716 1,383 Other market economies 6,412 3,975 10,387 Centrally planned economies 2,760 2,881 5,641 Total world 9,839 7,572 17,411 Reserves       United Statesb 201 221 422 Other market economies 3,122 1,225 4,347 Centrally planned economies 619 841 1,460 Total world 3,942 2,287 6,229 aIncludes natural gas liquids. bSource: U.S. estimates from B.M.Miller, H.L.Thomsen, G.L.Dolton, A.B.Coury, T.A.Hendricks, R.E.Lennartz, R.B.Powers, E.G.Sable, and K.L.Varnes, Geological Estimates of Undiscovered Recoverable Oil and Gas Resources in the United States, U.S. Geological Survey Circular 725 (Washington, D.C.: U.S. Geological Survey, 1975). adjust estimates of existing reserves to the current price situation started only recently and so far have covered only a small part of the United States. PROJECTIONS OF FUTURE DOMESTIC PRODUCTION Reserve and resource estimates do not in themselves reveal long-term production potential. They must be seen in the light of the rate at which additions to reserves are made. In the United States, oil production has outpaced reported additions to proved reserves since the late 1960s if one excludes the Prudhoe Bay discovery because of its exceptional size. (It is estimated to contain nearly twice as much recoverable oil as the next largest field, East Texas, did in 1930 when it was discovered.)1 If one includes Prudhoe Bay, proved reserves are now about the same as they were 10 years ago. Domestic consumption shows an even greater disparity with reserve additions, by the amount of net imports, which have risen fairly consistently, from virtually zero in 1947 to about 15 quads in 1976. A reserves-to-production ratio of 8:1 or 10:1 is generally considered necessary to sustained production of oil; present U.S. reserves of both oil and gas are roughly 10 times annual domestic production. Thus, to sustain present production rates the United States must add about 20 quads each of oil and gas (the equivalent of current production) to reserves each year. This may be difficult. New discoveries are now often made in

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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems inaccessible locations, where exploration is more expensive and time consuming than it was when the large oil and gas fields in the interior of the United States were opened in the first half of this century. Major new finds are increasingly made in places as remote as the Alaskan North Slope or in offshore areas. Moreover a large proportion of recent drilling in the United States has been directed at relatively small onshore prospects whose aggregate contribution to total reserves is quite limited. Higher oil and gas prices, of course, provide a strong incentive for exploration of these prospect areas, even though the cost of drilling has also risen rapidly. (Between 1972 and 1976 the cost per foot drilled, for all wells including dry holes, almost doubled, from $20.76 to $40.46, in current dollars; the prices of new oil and intrastate gas, however, approximately quadrupled.)2 One way to understand the trend of exploration is to calculate the number of barrels of oil or cubic feet of gas added to reserves per foot drilled in exploratory and development wells. Data available for 1960–1974 (excluding Prudhoe Bay) indicate that approximately 15 barrels of crude oil and 92 thousand ft3 of natural gas were added to reserves for each foot drilled in that period. If one assumes, with most petroleum geologists, that the average finding rate will be smaller in the future (say 10 barrels of oil and 60 million ft3 of gas per foot drilled), then it would be necessary to drill some 360 million ft each year to maintain present oil and gas production. (Twenty quads is equivalent to about 3.6 billion barrels of oil or 20 trillion ft3 of gas.) This is not impossible; drilling has been rising rapidly, and the 1978 figures approached the mid-1950s peak of 230 million ft. However, it is quite possible that the finding rate will drop further as exploration moves toward yet more difficult areas and still smaller fields. In fact, preliminary figures for the most recent years suggest a sharp fall in the finding rate. The minimum annual need for drilling may therefore be larger than calculated above. The rate at which oil and gas will actually be produced depends on both cost-price considerations and the general financial and regulatory climate in which resource development is carried out. The Supply and Delivery Panel, concluding that oil and gas producibility depend more on institutional variables than on price, did not attempt to derive price-versus-supply curves for oil and gas, but instead focused on financial, institutional, environmental, and regulatory constraints on production.3 It described three scenarios, based on three postulated sets of assumptions about the climate for development. These scenarios reflect the judgments of a body of experts on the potential of oil and gas production under various conditions. They do not, of course, represent the only possible future conditions.

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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems Business-as-Usual Scenario This scenario projects future oil and gas production as if the uncertain policy and financial conditions of 1976 remained in effect through 2010. It depends on the following assumptions. Price controls on domestic oil and gas remain in effect and keep domestic oil and gas prices below world market prices. Current environmental considerations, including requirements for environmental impact statements and strict environmental quality standards, remain in effect. Public lands continue to be withdrawn from exploration. Development of the outer continental shelf continues to be a two-stage process, involving both exploration permits and federal and state production permits. Exploration and production technology continue to evolve at current rates. Moderately Enhanced Conditions Scenario This scenario projects oil and gas production under a set of assumed government incentives. The assumptions are the following. Federal offshore areas are leased at an accelerated rate. The offshore permit process is streamlined. Wellhead prices for “new” gas are decontrolled. Evolution of exploration and production technology accelerates modestly, mainly because decontrolled prices make enhanced recovery economical. Transportation of natural gas from the Alaskan North Slope is available by 1985. There is no change in land availability. Environmental regulations, including environmental impact statement requirements and environmental quality standards, remain in effect. National-Commitment Scenario This scenario projects oil and gas production if the government encourages production to the maximum extent, at the expense of other energy supplies and other social and political goals. It has some of the features of a national emergency program. Most constraints on production are lifted, and the federal government fosters capital formation and renders much other assistance to industry, essentially guaranteeing a return on investment. The assumptions are the following. Implementation of the Clean Air Act is relaxed, and the requirement

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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems for environmental impact statements is eliminated. Most other environmental standards are retained. Significant incentives for technology development, including loan guarantees, are established. More public land is made available for oil and gas exploration, including some wilderness areas and single-purpose tracts that had previously been withdrawn or had been otherwise unavailable. Needed goods, services, and personnel are given priority by the federal government. For example, steel intended for use in oil development might be given first-priority status. Tertiary oil recovery and production of natural gas from tight formations become economical, mainly due to price increases. Table 3–2 illustrates the estimated effects on domestic oil and gas production of the conditions of the three supply scenarios. By 2010, production is on the decline in all cases. Legislation and regulations in force as of 1979 appear to imply future conditions somewhere between the business-as-usual and the moderately enhanced scenarios. Subsequent legislation may change the outlook. TABLE 3–2 Estimated Production of Domestic Oil and Natural Gas Under the Conditions Assumed in the Supply Scenarios (quads) Year Present Conditions Moderately Enhanced Conditions National Commitment Oil       1975 20 20 20 1985 18 21 21 1990 16 20 21 2000 12 18 20 2010 6 16 18 Gas       1975 19.7 19.7 19.7 1985 13.5 16.1 18.5 1990 10.3 15.8 18.0 2000 7.0 15.0 17.0 2010 5.0 14.0 16.0 Source: National Research Council, U.S. Energy Supply Prospects to 2010, Committee on Nuclear and Alternative Energy Systems, Supply and Delivery Panel (Washington, D.C.: National Academy of Sciences, 1979).

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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems OIL As noted in Table 3–2, domestic oil production will decline over the coming decades, under the assumed conditions of the three supply scenarios. In the business-as-usual scenario, production drops to less than one third of its 1975 level by 2010. Even with the incentives of the moderately enhanced conditions and national-commitment scenarios, oil production peaks before 1990 at little more than its present level and then declines. Production under the conditions of the national-commitment scenario is only 10 percent higher than under those of the moderately enhanced conditions scenario. At the same time, liquid fuel demand, as projected by the Demand and Conservation Panel,4 is likely to increase from the present 35 quads to as much as 50 quads even in the middle-range energy demand scenarios. These projections imply that some combination of imports and domestic substitutes will be needed for the indefinite future. The following discussions of future imported and synthetic oil supplies focus on the difficulties in supplying the large amounts called for in the middle-range demand scenarios. FUTURE AVAILABILITY OF IMPORTS The oil import requirements of the United States already severely strain world market oil supplies, to the detriment of other importing countries. If U.S. imports continue to grow, they may be available to the United States only at very high prices. The political costs may be even less acceptable. Future U.S. demand for imported oil cannot be estimated with any precision. However, the trend toward increased imports will be very hard to reverse within the next several years, because of the time required for new conservation and production policies to produce their full effects, Beyond 1985, the deficit between domestic oil production and consumption will depend heavily on government policy with respect to supply, demand, and price. For example, by 2010 the need for oil imports would be very small if liquid fuel demand were held to 20–30 quads by the higher energy prices and the conservation policies assumed in the low-growth demand scenarios (chapters 2 and 11),5 if the policies implicit in the moderately enhanced conditions or national-commitment oil production scenarios were adopted and the upper estimates of coal-based synthetic fuel production6 were realized. Obviously, these many “if’s” make such a prospect unlikely. No less unlikely, since it calls for a probably unattainable and almost surely unsustainable level of imports (over 50 quads a year), is a case in which the

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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems oil demands of the highest-growth study scenario might be combined with the business-as-usual oil supply scenario and with slow development of a synfuels industry. A more likely middle case would still entail 15–30 quads of imports. While the exact values from these illustrative scenarios should not be taken literally, the trends are clear. Even in the middle case, the demand for imports in 2010 would be greater than it is today. This is clearly undesirable; U.S. demand on this scale, particularly if combined with the widely expected decline in world oil production near the turn of the century, would severely strain the world oil market. Supply and Delivery Panel estimates of future world production suggest that even this middle case would entail a U.S. demand for a larger percentage share of the world oil supply than at present; this would intensify the already great pressures on consuming countries less able than the United States to pay the resulting higher prices. Assuming for the moment that the United States were willing and able to pay the economic and political prices of larger imports, which countries would be able to supply them? Although growth in world oil output may be widely dispersed, the growth in export potential over the next two decades is likely to be concentrated in a few countries. About a third of the output growth will take place in the nonmarket economies (chiefly the Soviet Union and China); but growing demand in those countries will probably leave little or none available for net exports. Another third of the growth in production is likely to occur in Latin America (particularly Mexico), the North Sea, and possibly the United States if a large synthetic fuel industry is established. The rest will take place mostly in the Arab members of the OPEC cartel, with Saudi Arabia the most important source of additional supply. At present it appears that the only producers, outside the nonmarket economies, able to increase production enough to meet world demand will be Saudi Arabia, Iraq, and Mexico. Venezuela could also resume its former importance as an exporter by undertaking vigorous development of the Orinoco tar belt. Saudi oil policy is likely to be critical by that time, since for various reasons other producers are unlikely to produce at maximum projected capacities. Some countries whose petroleum resources will be approaching exhaustion will probably restrict production to extend the lives of the resources, as Canada, Venezuela, and Kuwait are doing even now, Members of the cartel, which will probably still be in existence, may attempt to restrict production to achieve higher prices rather than higher output. Few countries, in fact, have adopted government policies conducive to maximum oil production. Under these circumstances the demand for Saudi oil could exceed 50 quads by 1995. (The Saudis now, at

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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems temporarily enhanced production levels, produce about 19 quads annually.) It is easy to think of reasons why Saudi Arabia may be unwilling to increase production and may actually freeze or roll back production, Among these are the following. An inability to make productive use of the massive amounts of foreign exchange that higher levels of exports, at a possibly much higher price per barrel, would generate. Saudi concern about excessively rapid reserve depletion and exploitation of oil that could be more valuable to future generations. A shift to a less pro-Western political alignment. Dissatisfaction with the U.S. role in Middle East politics. The possibility of future conflict in the Persian Gulf area, which would disrupt oil supplies for long periods. Technical problems that could limit production. None of these can be considered implausible. Even if fortune favors the oil importers, Saudi production is very unlikely to exceed 28 quads in 1985 and 40 in 1995. Thus, the margin of excess capacity, under even the most optimistic assumptions about future world oil demand, will be thin indeed—and perhaps nonexistent.7 Could the World Oil Situation Improve? The preceding discussion has emphasized the unfavorable side of the world oil outlook. This is appropriate since the preponderant risks appear to be on that side. Nevertheless the probability of an improvement in the world oil situation, while small, is not negligible. Until one or two years ago, for instance, it was not realized that Mexico’s oil resources could be as large as Saudi Arabia’s. (For that matter, the substantial oil potential of the North Sea was discovered less than 10 years ago.) With exploration in many parts of the world as active as it is, the possibility of additional major discoveries cannot be excluded, though it would be imprudent to count on it. We should not forget that the past literature on world oil supply is replete with authoritative predictions of imminent exhaustion. The failure of these predictions in the past does not imply that they will fail in the future, but neither can it be taken for granted that oil production must decline in the near future. It should also be recognized that the natural desire of oil exporters to raise the price by restricting output often conflicts with other goals. All oil exporters have increased their imports rapidly, and some (e.g., Indonesia, Nigeria, and Venezuela) have actually run into balance-of-payments problems. Between 1974 and 1977 the dollar value of imports rose by over 500 percent in Saudi Arabia, 400 percent in Nigeria, 150 percent in Iran, and 134 percent in Venezuela. For all oil-exporting countries together this

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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems value rose by 163 percent. In 1974 only 27 percent of these countries’ exports were covered by imports; by 1977 the corresponding figure was 59 percent. The total trade surplus of these countries fell from $86 billion in 1974 to $60 billion in 1977, and was no doubt reduced further in 1978.8 An obvious way out of such problems is to export more oil, which is what Indonesia and Nigeria have done, though Venezuela has preferred to borrow abroad. In any case, decisions to leave oil in the ground are essentially speculative and therefore liable to disappointment.9 Few (if any) attempts to keep mineral prices at an artificial level have been successful for more than a few years in the past, but OPEC may well be the exception that proves the rule. In this connection it is also relevant that the demand for oil is sensitive to its price, although the necessary adjustments in demand (particularly in the stock of energy-using equipment) may take considerable time. In chapter 10 it is shown that oil demand outside of the United States has already been lowered by higher prices; in the United States this effect has been thwarted to some extent by price controls but is nevertheless detectable. None of these observations, we repeat, weakens the serious concern expressed earlier. On balance the outlook is unfavorable, and vigorous measures are necessary. A rational energy policy, however, should take account of all contingencies rather than concentrate on those that appear to be of immediate concern. Until the early 1970s U.S. oil policy was aimed at protecting the domestic industry from cheap imports, which were seen as the principal energy-related threat facing this country; the possibility of much higher oil prices was simply ignored. In retrospect that policy appears foolish indeed (being in effect a “drain America first” policy), but at the time it was defended as a reasonable response to the most likely contingency. The least to be learned from this experience is that we do not know enough about the future to direct policies at the most visible threat only. (In the unlikely event of a decline in the world oil price, the question of protection would no doubt come up again; the more high-cost energy sources are developed in the meantime, the more insistent would the calls for protection be.) Conclusions on Oil Imports The gap between domestic supply and demand for oil will be equilibrated, of course. However, as the preceding discussion has shown, it may be difficult to equilibrate it entirely by increased imports. If the United States does not significantly increase its energy supplies and rather sharply reduce its demand for oil, the world price of petroleum is likely to rise rapidly in the last 10 or 15 years of this century. The probable result would

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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems be much higher prices for consumers in this country and curtailed consumption for those in less affluent consuming countries. Some importers might be forced to default on their debt obligations. In addition to these financial strains, a tight supply situation would increase the threat and the potential effectiveness of politically motivated supply interruptions. While oil imports will be important to this country for some time to come, national energy policy must take account of these international stresses. U.S. energy imports must be considered not merely in terms of their price in dollars, but also in the context of global economics and politics. OIL SHALE U.S. oil shale resources are estimated to contain 3660 quads of recoverable oil. Technologies for exploiting them exist and, if the price were right, the necessary production facilities could begin construction immediately. The Supply and Delivery Panel reports, however, that oil from shale cannot compete with natural petroleum until oil prices reach $21.50–$27.50 (in 1978 dollars) per barrel, if the venture is financed entirely with equity capital. This is somewhat less than the estimated price at which synthetic crude from coal would become competitive, but it is higher than the current price of “new” oil in the United States. Furthermore, a number of important technical and environmental problems must be considered in planning and developing a shale oil industry. The severities of these problems vary considerably depending on the process used for extracting the oil from the shale rock. The important considerations include the mass of material that needs to be handled, the toxicity and leachability of spent shale, the water requirements, the air and water pollutants released in retorting, and the socioeconomic implications for the localities involved. A number of experimental projects have helped identify these problems and possible solutions. To ensure that oil from shale can be extracted successfully and in an environmentally acceptable way, the private sector should be encouraged to begin pioneer projects immediately. Incentives such as price subsidies or market guarantees are probably sufficient to attract the necessary investment. All the facilities should be of commercial scale, and everything needed for technical, economic, and environmental success should be included. These projects would help determine whether solutions to all the problems that would be faced by a commercial industry are available. One or two years of successful pioneer operation would lay the foundation for rapid but orderly growth of a commercial oil shale industry. Pioneer projects could be based on underground or surface mining with surface retorting, or possibly on a modified in situ operation. Surface-

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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems retorting techniques have been tested more completely than the modified in situ method and therefore are more assured of success. They also handle better grades of shale and offer higher production rates. In the modified in situ process, part of the shale is mined to open a suitable underground retorting cavity, and then retorted at the surface; the bulk of the shale is retorted in place. This process appears promising in its potential for reducing costs and the difficulties of materials handling and waste disposal. The nation should not lightly forgo the opportunity to obtain this large additional source of badly needed hydrocarbon liquids. Environmental considerations are critical, and pioneer projects would permit impacts to be fully assessed at relatively low total risk and cost, particularly relative to the potential long-term benefits. Pioneer projects offer a step-by-step way to show whether solutions to these and the remaining technical problems are possible and acceptable. At present it is difficult to predict the maximum production potential of oil from shale. According to the Supply and Delivery Panel10 it is quite modest—a maximum of 3 quads annually by 2010—even under national-commitment conditions. COAL-DERIVED SYNTHETIC LIQUID FUELS Coal can be converted into liquid and gaseous fuels comparable to those in common use today. Even at present (1979) oil prices, synthetic oil from coal would not be competitive; the Supply and Delivery Panel estimates the cost of synthetic liquids at $30–$36 (1978) per barrel, or almost twice the price of imported oil. However, if depletion of worldwide reserves drives up the price of petroleum and improved technology lowers the relative price of synthetics, the prices of imported and synthetic oil will tend to converge. The government has financed a number of experimental synthetic fuel development projects at the pilot plant level. However, the government’s role with respect to technologies that are near to commercialization can take either of two directions. On one hand, it can create a healthy climate for private investment by assessing the nation at large. This can be done directly or contingently through market guarantees, completion assurances, subsidies, grants, loans, and significant tax and capital recovery policies. On the other hand, private investors could be encouraged through a regulatory process that assesses a narrower community—the consumers of the products. This can be done with tariffs that cover the risks of project completion, price, and investment return. Other possibilities include all-events tariffs, surcharges, fuel adjustment clauses, and escalation provisions. In any case the potential investors would have to be assured that whatever regulation or policy is used has the virtue of constancy.

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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems This study’s estimates of the potential availability of coal-derived synthetic liquid fuels under three sets of assumptions about government incentives indicate that a significant contribution from such synthetics is at least 15 years away. At best a few quads of synthetic liquids will be produced from coal by 1990, although up to 12 quads could be available by 2010 if environmental problems can be solved. Coal conversion, like shale oil development, presents serious environmental and health hazards that will probably limit the ultimate attainable production level and slow the buildup of production. The most severe hazard is probably the strain a large conversion industry would exert on already scarce water resources, in western states especially but also in many parts of the East. (See chapter 4 for more detail on water-supply concerns.) Coal conversion also produces a number of degradation products (organic and inorganic) that could contaminate the air and, especially, water. It is too early to state how easy or expensive their control will be, but there is no case for overriding pessimism. For a more complete treatment of the technology and risks of coal conversion, see chapters 4 and 9. PROJECTIONS OF TOTAL DOMESTIC LIQUID FUEL PRODUCTION Table 3–3 summarizes the Supply and Delivery Panel’s estimates of domestic production of all liquid fuels, both natural and synthetic, under the conditions of the three supply scenarios. GAS In 1975, about 20 quads—or 27 percent of U.S. primary energy consumption—were supplied by natural gas. Over half the country’s households and a great majority of commercial and industrial premises are connected to the gas network. In 1976–1977 (perhaps a somewhat exceptional period), natural gas demand exceeded supply by an estimated 3.8 quads; the difference was met by curtailments of supply. At present only about 0.3 quad of gas is imported, relatively little synthetic natural gas is being produced from petroleum liquids, and essentially no synthetic gas is produced commercially from coal. Because these products are still more expensive than domestic natural gas, their wide introduction in the near future depends on federal pricing policy and other regulations, applied consistently and predictably enough to assure potential investors of reasonable returns. Because of the relative attractiveness of gaseous fuels, as gas prices rise the declining supply of domestic natural gas will probably be supple-

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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems TABLE 3–3 Projected Domestic Liquid Fuel Supply (quads per year) Scenario and Energy Source 1975 1985 2000 2010 Business as usual         Petroleum 20 18 12 6 Coal-based liquid fuels — 0.1 2.3 6.1 Shale oil — — — — TOTAL 20 18.1 14.3 12.1 Enhanced supply         Petroleum 20 21 18 16 Coal-based liquid fuels — 0.1 2.4 8.0 Shale oil — 0.2 1.0 1.5 TOTAL 20 21.3 21.4 25.5 National commitment         Petroleum 20 21 20 18 Coal-based liquid fuels — 0.1 4.7 12.9 Shale oil — 0.7 2.5 3.0 TOTAL 20 21.8 27.2 33.9 Source: Compiled from National Research Council, U.S. Energy Supply Prospects to 2010, Committee on Nuclear and Alternative Energy Systems, Supply and Delivery Panel (Washington, D.C.: National Academy of Sciences, 1979). mented by increased imports and conversion of coal into synthetic gas. Table 3–4 lists projections of the availability of domestic and imported natural gas and of synthetics from coal, under the varying assumptions of the Supply and Delivery Panel’s three supply scenarios. In the business-as-usual scenario, supply would be curtailed in the intermediate term, largely because of the time it would take to build up a synthetic gas industry.* IMPORTS Transportation costs are more important for natural gas than they are for oil. Large quantities of gas in other countries are flared, reinjected, or simply left in the ground for lack of local markets. The most economical means of moving large amounts of gas over very long distances, particularly across oceans, is to liquefy it by cryogenic techniques and transport it by special tankers. The technology for doing so has been available for years, but the high cost and concerns about the safety of * See statement 3–1, by H.Brooks, Appendix A.

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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems TABLE 3–4 Projected Gas Availability (quads) Scenario and Energy Source 1975 1985 2000 2010 Business as usual         Domestic natural gas 19.7 13.5 7.0 5.0 Imported natural gasa 0.2 2.3 3.1 3.1 Synthetic gas from coalb 0 0.3 3.5 4.1 TOTAL 19.9 16.1 13.6 12.2 Moderately enhanced conditions         Domestic natural gas 19.7 16.1 15.0 14.0 Imported natural gasa 0.2 2.5 5.2 5.2 Synthetic gas from coalb 0 0.5 3.5 4.8 TOTAL 19.9 19.1 23.7 24.0 National commitment         Domestic natural gas 19.7 18.5 17.0 16.0 Imported natural gasa 0.2 2.7 7.4 7.4 Synthetic gas from coalb 0 0.7 4.5 7.9 TOTAL 19.9 21.9 28.9 31.3 aIncludes gas from Canada plus liquefied petroleum gas and liquefied natural gas from other nations. bDoes not include low-Btu synthetic gas, Source: Data are from National Research Council, U.S. Energy Supply Prospects to 2010. Committee on Nuclear and Alternative Energy Systems, Supply and Delivery Panel (Washington, D.C.: National Academy of Sciences, 1979). handling and storing the highly volatile and flammable liquefied natural gas (LNG) have limited the growth of this trade. A small fraction of a quad of LNG is now being imported to this country to serve peak loads, and the scarcity of domestic natural gas could make LNG more attractive if there were no alternatives. However, for shorter distances, especially on land, pipelines are less costly than LNG transportation. There are prospects of importing gas by pipeline from Canada and Mexico. Negotiations are under way, and it is reasonable to assume that some quantities of natural gas will be imported from these countries. The timing of these imports will depend largely on the pace of the negotiations. NATURAL GAS IN UNCONVENTIONAL FORMATIONS Very large amounts of natural gas are dispersed in unconventional geological formations such as the tight brown shales of several Appalachian and midwestern states, coal seams, and the geopressured thermal brines of the Gulf Coast. Very small amounts are now being produced from the shales, and some gas is drawn from coal seams before mining,

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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems mainly as a safety measure. The geopressured deposits are not exploited, and it is likely that the gas cannot be produced economically unless the heat and mechanical energy in the brines can be exploited at the same time, which is by no means certain. (See chapter 8.) None of these is an economic source of gas at present prices, but the expected rise in energy prices between now and 2010 will make such low-grade sources more attractive. Most such deposits are unlikely ever to be produced at rates comparable to those attained in current gas fields, but for local use they could become important. SYNTHETIC GAS Coal can be converted to a variety of gaseous fuels, by a number of fairly well-developed technologies (chapter 4). In principle, a coal conversion industry could be developed to the point of producing as much as 8 quads of gas by 2010 (Table 3–4). However, as discussed in the earlier treatment of synthetic liquid fuels from coal, this depends on a number of considerations. First, the supply of water to meet the requirements of the conversion process is in question, and supplies must be considered and managed carefully. In addition, there are the problems of assessing and controlling the risks of air and water pollution. The technology is unfamiliar and untried on the requisite scale, and the rate at which these problems can be understood and controlled will largely determine the rate of development of a coal conversion industry. THE OUTLOOK FOR OIL AND GAS IN THE INTERMEDIATE TERM The analyses underlying this chapter suggest on balance that domestic supplies of liquid and gaseous fuels will decline further while demand continues to increase. The potential for greatly increased imports, especially of oil, appears to be limited. In fact, the study’s scenarios (chapter 11) suggest the possibility, under even moderate energy growth assumptions, of brief but recurrent shortages of oil and perhaps of gas. Such shortages could have the same transient character as the episodes following the 1973 OPEC embargo, those experienced during the cold winter of 1976–1977, and the gasoline shortages of 1979. Whether this problem materializes will depend to a large extent on the maintenance of price controls, which discourage production and encourage consumption. If it does materialize, the government must see to it that available supplies of specific fossil fuels go to those applications for which they are best suited and most needed. Usually, though not invariably, this will mean

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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems reserving natural gas for space heating and special applications in industry, oil for transportation and petrochemicals, and coal for generating steam and electricity. While the allocation of increasingly scarce fuels could probably not be left entirely to the market in an emergency situation, care must be taken to prevent distortions of the price mechanisms that result in false signals to consumers and producers and thus aggravate the long-term problem. Any allocation system should preserve a reasonable balance between household use and industrial or commercial use; giving households absolute priority in natural gas, for instance, may lead to avoidable unemployment and loss of nonenergy output. It has already been argued that a vigorous program of conservation and enhanced domestic production is required, with the overall aim of reducing U.S. dependence on imported oil and gas as much as possible over the coming decades. However, even those members of CONAES who are convinced that the oil and natural gas era is coming to an end feel that improved domestic production is essential to permit a transition to sustainable long-term energy sources. For reasons of national security, minimizing dependence on imported oil should be accorded prominence in national energy policy comparable with other foreign policy goals related to energy, such as avoiding the proliferation of nuclear weapons. The social, economic, and political prices this country pays for oil imports are likely to become less and less acceptable over the next 10–20 years. How critical this problem may yet become will depend in large part on how seriously it is taken by the government and the people of this country. NOTES    1. Richard Nehring, Giant Oil Fields and World Oil Resources (Santa Monica, Calif: Rand Corporation (R-2284-CIA), June 1978).    2. American Petroleum Institute, Basic Petroleum Data Book, Section III, Table 10, Supplement (Washington, D.C.: American Petroleum Institute, 1978).    3. National Research Council, Energy Supply Prospects to 2010, Committee on Nuclear and Alternative Energy Systems, Supply and Delivery Panel (Washington, D.C.: National Academy of Sciences, 1979).    4. National Research Council, Alterative Energy Demand Futures to 2010, Committee on Nuclear and Alternative Energy Systems, Demand and Conservation Panel (Washington, D.C.: National Academy of Sciences, 1979).    5. Ibid.    6. Supply and Delivery Panel, op. cit.    7. William A.Johnson and Richard E.Messick, “The Supply and Availability of Imported Oil Through 2010,” preliminary report for the Supply and Delivery Panel (Available in CONAES public file, April 1977).    8. International Monetary Fund, International Financial Statistics (Washington, D.C.: International Monetary Fund, January 1979), pp. 36–37.

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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems       9. Keeping a mineral off the market is profitable, generally speaking, if its price rises more rapidly than the rate of interest. Studies of nonfuel minerals suggest that over long periods of time this condition has rarely been satisfied, For a recent analysis along these lines see G. Anders, W.P.Gramm, and S.C.Maurice, Does Resource Conservation Pay?, Original Paper 14. (International Institute of Economic Research, July 1978). Available from Green Hill Publishers, Inc., P.O. Box 738, Ottawa, 111. 61350.    10. Supply and Delivery Panel, op. cit.